An enterprise when included obtains the repute of an artificial character. This artificial man or woman has an identity break free of its participants. In order to safeguard the hobby of the individuals and for efficient control of the affairs of the organization, the reins of the business enterprise are given inside the arms of a few human beings elected through the corporation’s shareholders. These elected people together represent the Board of Directors of the organization.
According to the provisions of the Companies Act, 2013 (“the Act”), the Board has to be nicely constituted, i.E. It should consist of a minimum number of administrators as required for each type of organization, with the stability of govt and non-executive directors (mandatory in case of some companies). Though the Act does now not differentiate between the obligations and responsibilities of a govt and non-executive director, it’s far very vital to understand the distinction among the two so that it will pick out the officer in default in case of contravention of the provisions of diverse Statutory Acts applicable on a company.
Here, we shall study the liabilities of non-govt and unbiased administrators, supported by way of case laws. But first, let us briefly recognize who is a non-executive and independent director.
Executive, Non-government and Independent Directors
In trendy parlance, Executive Director can be described as a member of the Board who’s additionally answerable for the management of the organization. On the alternative hand, a Non-Executive Director is a Board member without any obligations for the daily management or operations of the employer or organization.
The Act defines the term “Executive Director” as follows:
Executive Director approach an entire time director as described in clause (94) of section 2 of the Act.
As according to Section 2(94) of the Act, “whole-time director” includes a director within the whole-time employment of the corporation.
From the above definitions, it is able to be derived that an Executive Director is a director who is in the whole-time employment of the corporation.
The time period Non-Executive Director isn’t always described within the Act. However, primarily based on the aforementioned, it can be deduced that a director who isn’t always in the whole-time employment of the employer is non-govt in nature.
Independent Director- The time period “Independent Director” is described below section 149(6) of the Act. For a layman, it could be described as such a category of administrators who are expected to have impartial and objective judgment for the proper functioning of the agency. They play a pivotal function in maintaining a transparent running environment inside the corporate regime.
Officer in Default
In order to apprehend the liabilities of Non-Executive and Independent directors, it’s miles essential to analyze the time period “Officer in Default”.
Officer in Default- Defined under section 2(60) of the Act, it offers a broad photograph of the persons who might also fall underneath this. Besides whole-time director and Key Managerial Personnel (KMP), it also includes:
folks who’re charged with any responsibility by the distinctive feature of authority given through the Board of Directors or KMP;
humans according to whose advice, guidelines, or instructions the Board of Directors of the employer is acquainted with the act (besides someone acting in expert capacity).
On analyzing the definition given under this segment, it could be inferred that a director/man or woman may be addressed as the officer in default most effective whilst he/she is chargeable for the commission or omission of an act (which constitutes the default) either knowingly or it takes place together with his consent.
The most essential thing of this definition is that it covers no longer most effective the administrators but additionally any other man or woman, who may not be a director but authorized by the Board to be accountable for a designated work.
Liabilities of Non-Executive and Independent Director
As according to segment 149(12) of the Companies Act, 2013, a Non-Executive Director/Independent Director can be held liable simplest for the one’s acts of omission or commission that happened with their knowledge, attributable thru Board processes, and with their consent or connivance, or wherein the directors did now not act diligently. “Connivance” has been distinguished by the courts from consent in the experience that connivance does now not require the parties to be of one mind.
Further, the Independent Directors are required to adhere to the “Code for Independent Directors” given in Schedule IV of the Act, which specifies roles, duties, and duties of Independent Directors., in order to ensure expert and fair behavior with the aid of them.
Let us now look at the liabilities of Non-Executive and Independent Directors in the light of judgments exceeded by the Hon’ble Supreme Court and different High Courts.
Sunita Palta & Ors v/s Kit Marketing Pvt. Ltd. (2020) – In this case, the Delhi High Court became to decide at the legal responsibility of the non-government administrators below phase 138 of the Negotiable Instruments Act, 1881 (“NIA”). It becomes held that an organization’s Independent/Non-Executive Directors aren’t liable for criminal proceedings underneath the said section, for the dishonour of cheque, as they may be now not involved within the everyday affairs of the corporation.
M.S. Pharmaceuticals Ltd. V/s Neeta Bhalla (2007)- In this case, the Supreme Court of India analyzed the vicarious legal responsibility of a person as consistent with phase 141 of the NIA. It became held that all and sundry related with the corporation shall not fall within the ambit of the provision. It is simplest the ones people who have been in the price of and liable for the behavior of commercial enterprise of the enterprise on the time of the commission of an offense, who will be answerable for crook action.
In Girdhari Lal Gupta v/s. D.H. Mehta & Anr. It changed into located that someone ‘in charge of a business’ way that the character must be in the overall management of the day after day enterprise of the Company.
In Chintalapati Srinivasa Raju v. Securities and Exchange Board of India, the Apex Court held that-executive administrators are persons who aren’t involved within the day to day affairs of the going for walks of the company and aren’t in fee of and not accountable for the conduct of the business of the organization.
As explained at the starting of this note, the Board of Directors is entrusted with the obligation to behavior the business of the corporation and to utilize its assets in the most efficient way in an effort to advantage its shareholders and other stakeholders. Thus, the administrators are in a fiduciary function with recognition to the company.
However, not all directors are involved in the management of the business enterprise’s affairs. Some of them are inducted at the Board that allows you to benefit from their experience within the applicable sectors. It could be, therefore, unjustified to preserve them responsibly, either criminally or civil, for the misdoings of the business enterprise until the wrongful act turned into dedicated together with his consent or knowledge. The above-quoted judgments make certain this protection to the non-government and impartial administrators.
Thus, it is able to be deduced that a non-govt director or impartial director isn’t taken into consideration as an officer in default simply at the ground that he’s a director in the organization. In order to keep him liable, the accusation must be supported with concrete evidence that he becomes on the helm of affairs when such offense turned into devoted.